The feet of the “Zouave” statue of the Alma bridge in Paris have been covered by the rising level of the Seine. It is the classic indicator for Parisians of a significant flooding of the river and a stark reminder of the historic 1910 event when the water reached the Zouave’s shoulders. If, as is the case today, only one tributary of the Seine is overflowing, what would happen if others did the same, as in 1910?
A major flood similar to 1910 would have direct and indirect impacts on nearly 5 million citizens, many companies and the life of the city for several months. In a 2014 OECD report, Seine Basin, Île-de-France: Resilience to Major Floods, the economic damage of a major flood in the Paris region was estimated at a minimum of EUR 3 billion up to a staggering EUR 30 billion for direct damage. The significant macroeconomic impact in terms of GDP, jobs lost and public finances also need to be taken into account.
One of government’s key responsibilities is to ensure that large metropolitan areas are resilient to major risks, to guarantee the safety and welfare of the public and maintain public trust. This is a major governance challenge. The governance of risks includes the need to develop a long term flood management strategy, to strengthen the risk culture, to foster urban resilience, particularly for critical infrastructure, and to develop a long-term financial strategy.
This is not only a challenge for Paris but is affecting countries across the world as vulnerabilities to climate change and its impact on precipitation patterns begin to be felt. OECD countries come together to discuss and share their experience with us in our High Level Risk Forum and OECD research and good practice support efforts to build resilience to major shocks and promote adaptation to climate change.
Following the Great East Japan Earthquake or the flooding associated with Hurricane Sandy in New York, governments, local authorities and civil society have become increasingly aware of the fragility of major urban centres when disasters occur and of the degree to which critical infrastructure are interconnected.
We need to assess the capacity of cities to adapt to extreme weather, water or climate events and look for innovative solutions to build resilience. Preventing such shocks from happening and limiting the damage they cause should be a public policy priority. The Paris floods are another call to action for the international community.
Before the recent crisis, the biggest failure of a commercial bank in the UK was the City of Glasgow Bank in 1878. The CGB collapse was due to mismanagement and fraud, and the authorities set up a commission of inquiry that recommended a number of measures to improve corporate governance. No they didn’t. They arrested the bank’s directors and sent them to prison, and corporate governance improved remarkably. As this Bank of England paper argues, the CGB collapse had a lasting impact on the financial system, requiring banks to be externally audited, and prompting a move away from unlimited liability banking (too late for William Love, whose newly worthless £200 shareholding exposed him to £5500 liability). The crisis also led to a wave of mergers and the emergence of the banking structure dominated by big banks we know today, as well as a change in risk management, with banks increasing the share of more liquid, lower-risk assets on their balance sheets.
The Bank of England paper discusses the lessons for today from the CGB crisis, and how the financial sector should change. The Bank’s Governor, Mark Carney, came back to the question in a speech last week about “Building real markets for the good of the people”. Carney argues that in the City, “Unethical behaviour went unchecked, proliferated and eventually became the norm. Too many participants neither felt responsible for the system nor recognised the full impact of their actions.” He feels “let down” by this, and explains how it contributed to “ethical drift”. I strongly advise you to use this lovely concept in court next time you’re caught stealing.
Why did they start drifting? It wasn’t to feed their starving children if the data in a new OECD Economic Policy Paper are right. Finance and inclusive growth shows that the finance sector pays better than other sectors, even for workers with similar profiles, and the gap with people doing similar jobs widens as you scale the corporate ladder. The paper doesn’t say whether this is because traders and the like are paid more than they’re worth or because the rest of us are paid less than we deserve. (What do you think, readers?) And in more news, “male financial sector workers earn a substantial wage premium over female financial sector workers, especially at the top”.
Another finding reminds me of a scene in a film with Roberto Benigni when he goes to the bank to borrow money because he’s broke. The banker refuses, explaining that you need collateral. Furious and incredulous, Benigni protests that when he goes to get tomatoes, the greengrocer doesn’t expect him to have aubergines in the house before he’ll serve him. That translates as “The distribution of credit can be an additional source of income dispersion if it implies that low income people cannot finance the opportunities they identify to the same extent as their better-off counterparts”.
These then are the findings most of us would have guessed or noticed anyway. The real surprise in the paper is the argument that there can be too much finance in the economy. The authors show that the extravagant salaries paid to the ethical drifters are only one of the negative consequences of the way the sector has developed. The analysis uses two direct measures of financial activity: the volume of credit provided by financial intermediaries such as banks to the non-financial private sector, and stock market capitalisation.
Over the past half-century credit by banks and other financial institutions to households and businesses in OECD countries has grown three times as fast as economic activity. Stock market capitalisation has tripled relative to GDP over the past 40 years, but today the value of stock markets still only equals 65% of GDP, just over half that of financial sector credit.
The OECD economists looked at how this growth in the financial sector affects growth in the rest of the economy. Initially, an expanding financial sector is beneficial, but it eventually reaches its ideal weight, and apart from contributing to inequality, “further increases in its size usually slow long-term growth”. This conclusion holds even when you consider a range of other factors including country specificities, the business cycle, and even financial crises. In general, more credit to the private sector slows growth in most OECD countries, while more stock market financing boosts growth. Bank loans slow economic growth more than bonds. Credit is a stronger drag on growth when it goes to households rather than businesses.
The long-term increase in credit is linked to slowing growth through five channels, including bank lending increasing more than bond financing, and a disproportionate increase in household credit compared with business credit. The first channel the OECD identifies may however amuse those of you with good memories (or long-held grudges) – excessive financial deregulation. Compare and contrast that with this, from 2008: “Observing the changes that have taken place in the past 25 years, a consensus has emerged that a deregulated financial sector operating in a competitive, open environment with market-based supervision grounded in international norms, is optimal contribution for economic development.”
Still, we admit our mistakes and are trying to learn from them, and even have a whole programme called New Approaches to Economic Challenges (NAEC) that calls for “a serious reflection to revisit policy approaches” in the wake of the crisis. Can the financial sector and the policymakers who influence it do the same? The OECD strategy to reform the financial sector to stop it slowing growth and making inequality worse has three broad components.
First, use macro-prudential instruments (measures that address risks to the whole system rather than individual institutions) to prevent credit overexpansion, and make sure banks maintain sufficient capital buffers. Second, reduce subsidies to too-big-to-fail financial institutions through break-ups, structural separation, capital surcharges or credible resolution plans. Reduce the tax bias against equity financing and make value added tax neutral between lending to households and businesses.
We could also remind the financiers what The Spectator said in arguing against a national subscription to help William Love and the others: “The notion that a grand failure is a pure misfortune, and one for which the partners are irresponsible, is one far too widely diffused already, and one which it is wrong as well as inexpedient to make deeper.”
Too Much Bank Lending Can Slow Economic Growth: OECD Chief Economist Catherine Mann talks about the impact of bank lending on finance practices and economic growth on Bloomberg Television’s “Market Makers.”
The latest Climate Change Report from the IPCC argues that human interference with the climate system is occurring, and climate change poses risks for human and natural systems. The report identifies eight major risks with high confidence, and says that each of these risks contributes to one of more of the five “reasons for concern” (RFC) the authors identify:
- Unique and threatened ecosystems and cultural systems.
- Extreme weather events.
- Uneven distribution of impacts, with disadvantaged people and communities facing greater risks.
- Global aggregate impacts, for example global biodiversity loss.
- Large-scale singular events, such as Arctic ecosystems or warm water coral reefs reaching an irreversible tipping point.
The report isn’t totally pessimistic, and it concludes that transformations in economic, social, technological, and political decisions and actions can enable climate-resilient pathways. It doesn’t say what the favoured options should be, and of course a mix of approaches should be taken, but we’d like your opinion on what the dominant options should be. For the sake of simplicity, we’ve labelled the options “government”, meaning intervention through regulation or taxation for example; “technology”, for example new ways to produce energy or reduce natural resource use; “behaviour”, for example consuming less or recycling more; or “markets”, for resources that become too expensive will be abandoned in favour of other solutions. You can select two options if, for example you think that technology plus markets or behaviour plus government is the best option.
Here are the eight risks.
This week, around 30,000 children under the age of five will die from water-related diseases, one every 20 seconds. In fact unsafe water now kills more people than all forms of violence, including war, with diarrheal diseases claiming 1.8 million victims a year and causing more deaths in children under 15 than the combined impact of HIV/AIDS, malaria, and tuberculosis. Uleftae Mundeo from Manzo in Ethiopia told NGO WaterAid what that means. “Children often die here from the water. Often all of the money we earn from farming is spent on medicine.”
Uleftae uses a local pond, but often collecting water means walking a dozen or more kilometres a day carrying a heavy load, leading to chronic back pain and sometimes spinal deformities. China’s Global Times interviewed 12 year-old Mi Guie who spent her weekends helping her parents fetch water after a drought hit Yunnan Province in 2009-10. They walked for hours getting to and from the nearest river, climbing a 600 metre high cliff on the way there and back, for a few litres of muddy water each time.
In areas where supply is worst, women and girls (always them) get up in the middle of the night and queue for hours for their turn then a couple of hours more as water trickles into buckets. In urban areas, the problems are different but no less serious. Infrastructure hasn’t expanded as much as population, leaving millions of citizens with no access to piped water and modern sanitation, or forced to live near open sewers carrying household and industrial waste. One of these sewers caught fire in a shantytown in Nairobi in September 2011 after petrol spilled into it, burning to death over 100 people.
Fortunately for us, stories like these don’t take place in OECD countries, but the number of water-related disasters has increased worldwide over the last three decades, particularly floods, droughts and storms, with almost 40% in OECD countries, 30% in the BRIICS and 30% elsewhere. Only about 5% of the victims were in OECD countries, although OECD countries suffered almost two-thirds of the economic losses.
Floods accounted for well over 40% of the disasters over 1980-2009, storms nearly 45% and droughts 15%. The number of victims ranges between about 100 million and 200 million per year with peaks of 300 million or more. Almost two-thirds of the victims are due to floods, with droughts and other temperature extremes accounting for 25% and storms the remaining 10%.
Economic losses were $50-100 billion a year between 1980 and 2009, although that jumped to $220 billion following Hurricane Katrina in the US in 2005. Storms account for half of all losses, floods one third and droughts almost 15%.
With so many different factors influencing and being influenced by each other, it’s hard to define an overarching framework to think about water-related issues. Even the basic geographical categories I used above aren’t that useful in many cases. Within a single “OECD country” like France, the main concern can vary from place to place – pesticides and fertilizers polluting rivers, financing the replacement of ageing infrastructure, limiting the impact of drought on economic activity…
However, “water security” provides a useful lens through which to examine the issues, as we celebrate World Water Day, especially as this year, World Water Day is part of the UN’s International Year of Water Cooperation. Water security is emerging as one the major global challenges of the 21st century. World water use is projected to be 55% higher in 2050 than it was in 2000, and the OECD Environmental Outlook says that by mid-century, nearly half the world population will live in river basins under severe water stress. That means an additional 1 billion people compared with today. These figures are only talking about the quantity of water available. Degradation of water quality adds to the uncertainty about future water availability.
In forthcoming work, the OECD will argue that when you talk about security, you’re implicitly or explicitly talking about risk, so a risk approach may be the best way to tackle water security. Water security would be defined as maintaining an acceptable level of risks in terms of water shortage or excess, pollution, and freshwater system resilience for society and the environment, today and in the future. The main thrust of a risk approach to water security would be to secure benefits for society and the environment in a way that maximises expected social welfare.
Issues ranging from infrastructure financing to climate change influence water resources, as well as economic activities have to be considered. Some of these activities are obvious, while others may come as a surprise, energy for example. Thermoelectric power generation accounted for 39% of all freshwater withdrawals in the US in 2000, roughly equivalent to water withdrawals for irrigated agriculture. You may also be surprised to learn how much water goes into making the products you use every day, over 15,000 litres for a kilo of beef for instance, or 1500 litres for a litre of apple juice. (You can calculate your own “water footprint” here)
From a risk perspective, water governance poses three main challenges: know the risk by obtaining the information needed to make effective and informed decisions; cap the risk by setting and enforcing acceptable limits on use and standards for water quality and flood protection; and managing the risk through policies and regulations that allow equitable and efficient allocation of water resources, equitable and efficient land-use planning for flood prevention, and implementing the polluter-pays-principle.
From a water cooperation perspective, that means for example ending the institutional fragmentation and promoting a multi-level approach so that all the different needs, options, and consequences can be looked at as a whole.
The problems are undeniable, but there is room for optimism. Next week sees the first meeting of the OECD Water Governance Initiative that argues that “Managed correctly, there is sufficient water on Earth for the world’s population”. I’ll drink to that.
Water Chapter of the OECD Environmental Outlook to 2050: The Consequences of Inaction
Today’s post is from Laurent Bernat Of the OECD Information, Communications and Consumer Policy Division
Cyber attacks are “as dangerous as conventional warfare”, according to German Chancellor Merkel. “One of the most serious economic and national security challenges we face”, says US President Barack Obama. And France considers that it will face a large scale cyber attack against national infrastructure in the next 15 years. The stakes are high.
While the nature of these attacks continues to include criminal activities motivated by financial gain (identity theft, credit card fraud, cyber ransom, etc.), the main emerging threats are large-scale denial of service attacks, information leaks, targeted cyber espionage, and the disruption of critical infrastructures. Examples include the massive attack on Estonian networks in 2007, large scale denial of service attacks against Korea and the United States in 2009, waves of espionage targeting governments, institutions and firms, and large scale personal data leaks such as the one that affected 77 million customers of Sony in 2011.
Surprisingly, states themselves seem to be emerging as new sources of threats, as rivalries and disputes spill over into cyberspace. News accounts of cyber espionage, sabotage and deception now read like something out of a James Bond film. The alleged physical disruption of the Iranian nuclear enrichment programme using the Stuxnet worm is but a recent example.
So what are governments doing to prevent the World Wide Web from devolving into the Wild Wild West? According to a new study of national cybersecurity strategies in OECD countries, they’re focusing on how to deal with a serious cyber incident – a possibility envisaged in nearly all the strategies – but in a way that does not undermine the openness of the Internet. As the Internet has become an essential infrastructure for the economy and society, the consequences of interruption can have disastrous impacts.
National strategies now aim at achieving two interrelated objectives: strengthening security for the Internet economy to further drive economic and social prosperity, and protecting cyberspace-reliant societies against online threats. Managing these two objectives in parallel, while preserving the openness of the Internet and fundamental values, is probably the main challenge of cybersecurity policy making today.
The ongoing challenge for governments is to ensure that cybersecurity policies support prosperity and development rather than undermine it. To this end, the OECD promotes a risk-based approach whereby a certain level of risk is accepted in order to preserve the economic and social benefits made possible by an open Internet. Security should thus aim to reduce risk to an acceptable level through appropriate and balanced measures rather than to simply control threats by reducing openness and interconnectivity. The flexibility, scalability and management aspects of this approach reduce the cost of security, without restricting choice, stifling innovation or limiting the adoption of new technologies.
An OECD consultation of non-governmental perspectives found that multi-stakeholder collaboration is the best means to develop effective cybersecurity policies that respect the fundamentally global, open and interoperable nature of the Internet. NGOs however express concerns regarding the blurring of boundaries between the economic and social dimensions of cybersecurity and the emergence of sovereignty considerations.
The OECD has now launched a broad consultationof all stakeholders from member and non-member countries to review its Security Guidelines. The review will take into account newly emerging risks, technologies and policy trends around such areas as cloud computing, digital mobility, the Internet of things, social networking, etc. It will also build on successful policies in national cybersecurity strategies and consider ways to foster greater international co-operation among governments, consistent with the 2011 OECD Recommendation on Principles for Internet Policy making. More to come!
“If I took a different way, would it have changed our fates a little?”
Asking the “what if” questions is just something we do when, looking back after a tragedy, we try to collectively understand what went wrong, what might have been prevented and what we might have done differently. In the case of Japan’s earthquake-tsunami-nuclear disaster, the crisis hasn’t yet passed.
For now the world waits and watches the Fukushimi Daichii reactors, their cooling mechanisms and the small crew of workers still on site struggling to stave off the worst forms of disaster.
But while we wait we ponder – how far can we trust ourselves, and the systems we devise, to resist both predictable and unpredictable catastrophes? The particular combination of earthquake, tsunami, nuclear accident and bad weather was unpredictable, but all of these items are studied in Japan’s disaster response planning.
Indeed, at the request of the Japanese government, in 2009 the OECD carried out review of Japan’s risk management policies concerning large-scale floods and earthquakes. Among other recommendations, the report states that: “Industries that can trigger special harm in case of flood accidents, such as chemical and nuclear industries, should be required by law to move to safer areas”.
In fact, often after a disaster strikes, it turns out that warning went unheeded, or terrible mistakes were made. At Bhopal, security systems were disabled to save money.
At Three Mile Island, an indicator on a valve gave ambiguous information.
In the world’s worst plane crash at Tenerife airport in 1977, a pilot took off without clearance. It can be the case, as for Deepwater Horizon, that neither machines nor people behave as expected.
And in the Fukushima plant, emergency generators were in place, but not on high enough ground. So the backup system itself was vulnerable, making catastrophic failure possible. The spent fuel is stored next to the reactor, so damage to the reactor can damage the stored rods too. The “comparatively smaller and less expensive containment structure” makes the reactor more vulnerable than other designs.
What are we missing about the interaction of complex systems (the human mind/will/choice patterns being one of these) that allow these huge catastrophic events to occur in spite of multiple redundant systems, failsafes and billions of dollars directed at preventing them?
What would allow us to improve risk assessment? A better understanding of human perception of risk for a start. Why we tend to minimise it, why we are overly optimistic about our ability to manage it and deal with events when they arise, why our love for the elegance of technology and engineering leaves us blind to its weaknesses.
We have to pay attention to the combination of human factors, economic opportunism and political influences that characterise decision making in a practical context. Rather than deploring these exogenous influences, they could be integrated into the process – by assuming that operators will always look for ways to save time/money/effort or that industry will resist backtracking on a technology that has been adopted. We have to learn to factor the costs of catastrophe – environmental economic and social – into the decisions around prevention and maintenance.
Otherwise, we end up with grim advice such as that given by Yuli Andreyev, former head of the agency tasked with cleaning up after Chernobyl. Yesterday, he told the Guardian that the Japanese authorities “had to be willing to sacrifice nuclear response workers for the good of the greater public”.
Nuclear safety and regulation Nuclear Energy Agency
The Security of Energy Supply and the Contribution of Nuclear Energy Nuclear Energy Agency
This post is contributed by Harvey Rubin, a member of the steering group of the OECD Future Global Shocks project and Director of the Univerity of Pennsylvania Institute for Strategic Threat Analysis and Response, and Nicholas Saidel, a Research Specialist at ISTAR.
Thinking about certain aspects of public health and infectious diseases as “existential threats” to human security arguably began as early as December 10, 1948, when the General Assembly of the United Nations adopted and proclaimed the Universal Declaration of Human Rights, in which Article 3 states: “Everyone has the right to life, liberty and security of person.” This was reaffirmed in the United Nations Development Programme (UNDP) of 1994 and again in the 2003 UN Commission on Human Security. These efforts conceptualize security as human-centric rather than the traditional state-centric and include protection from the shocks that affect human safety and welfare – such as disease, hunger, unemployment, crime, social conflict, political repression and environmental hazards. In this formulation, the nature of an existential threat depends in part on the particular threatened sector.
The traditional national security threat is understood to be the threat to the survival of the sovereignty, territory and physical condition of the nation. To the medical community in general, and especially to the public health and infectious diseases sectors, survival clearly refers to taking every action to minimize morbidity and mortality as well as to minimize the effect of disease on the economic, social and political stability of communities, nations and transnational organizations. HIV/AIDS is frequently discussed in the context of securitizing public health issues. This discussion originated with the UN Security Council Resolution 1308 (2000), which placed HIV/AIDS squarely in the cross-hairs of the security debate by stating: “Stressing that the HIV/AIDS pandemic, if unchecked, may pose a risk to stability and security.” More recently, obesity has been identified as a national security issue by retired generals and admirals in the report Too Fat to Fight, concluding: “If we don’t take steps now to build a strong, healthy foundation for our young people, then it won’t just be our military that pays the price – our nation as a whole will suffer also.” Even Michelle Obama identified obesity as a national security issue in the announcement of her ‘Let’s Move’ campaign.
Where will the securitizaton of medicine and the medicalization of security lead with regard to the future of public health, and conversely, with regard to the future of national security? These issues are generally addressed in the literature of the political scientists. For example, Stefan Elbe’s new book, “Security and Public Health,” analyzes the framing of health problems as security concerns and whether this framing helps or hinders controlling these problems in national and international political, social and economic venues. Elbe convincingly uses HIV/AIDS, SARS, and H5N1 influenza and bioterrorism as case studies of the effect of medicalizing security. Much like traditional security issues formulated in military language, a responsible reaction to threats is the development of countermeasures. Widening the security gambit to include an “inflated list of possible medical threats to security (Elbe)” can lead to a corresponding extension in funding for medical countermeasures – new vaccines and therapeutics. From our point of view—why is this bad?
The controversy over sovereignty rights concerning epidemiological data and, more specifically, on influenza sequence data that continues to engage the international community, is fascinating. This issue crystallizes many of the concerns of the national security community, including potentially weakening the traditional military agenda by widening the spectrum of security threats, removing the discussion of policy issues from the biomedical and public health practitioners and placing it in the hands of the diplomats, the military and possibly even the intelligence community, and focusing attention on the needs of the economically and militarily stronger countries and not on global health.
Understanding and dealing with the interdependencies of public health and national security spans widely divergent disciplines of clinical medicine, public health, basic biomedical science, economics, political science and international relations and deserves a deep and broad analysis by the interested parties. In this respect, Dr. Lincoln Chen’s comments in his address to the Helsinki Process Track on Human Security are instructive.
Given the perpetual tension between the demands of national security and the need to protect civil liberties, a balance must be struck whereby states can deal with national emergencies efficiently but without an unreasonable erosion of citizens’ privacy rights. Moreover, an international system that fosters, rather than inhibits, cooperation between states in terms of data sharing and bio-surveillance is required. For these reasons, we propose the implementation of a Global Compact for Infectious Diseases.